The Origin Of Accounting Theory

If it's to be comprehensible and reliable, accounting must be utilized in accordance with specific rules and regulations. It would be chaos of Babylonian proportions if everyone used his own grammar and vocabulary - nobody would understand anybody else. Likewise, it's essential that accounting is employed consistent with generally accepted rules.

The first prerequisite is that accounting should agree or conform with the essential truths consistent with which our financial system functions; the present economic and business practices and therefore the applicable law as embodied in legislative regulations or common law. Consequently, it's important that uniformity is maintained in accounting practice; in other words, a selected set of circumstances, wherever it's going to be encountered must be addressed by everyone in just an equivalent way within the accounting process.

Accounting theory creates a framework that ensures that accounting practice complies with the wants of conformity and uniformity. This theory is embodied in a set of principles, policies, methods, procedures and conventions. The continuously increasing scope and complexity of our financial system requires a corresponding process of adaptation in accounting so as that the relevant information regarding economic activities could also be recorded. It is essential that everybody involved in accounting should understand this process of adaptation; moreover, a prerequisite for such understanding may be a grasp of not only the idea of accounting, but also the structure of that theory.

Accounting theory is predicated on a group of basic economic truths that are of a dual nature. First, accounting theory is predicated on propositions generally accepted within the economic order of a specific society. For example, consider the concept of private ownership: a general accepted tenet of our society is that the prerogative of each person to have things - they're his personal property and no one else's. This concept is a basic economic truth.

Second, the essential economic truths have characteristics almost like those of natural laws within the sense that specific causes generate specific consequences. If, for instance , someone derives greater value from a transaction than what was put into the transaction, his net worth - his wealth - will have increased by the excess amount. This, too, is a basic economic truth. These economic truths are formulated as concepts and postulates. A concept may be a generally accepted view of a selected phenomenon, which is described in specific terms. A postulate may be a generally accepted hypothesis or supposition of a selected condition or phenomenon, which is a basis for the formulation of principles.

In the development of accounting theory, concepts and postulates function formulations of the essential truths or propositions upon which the idea is predicated . They do not plan to prescribe the working of the accounting process, but simply the inspiration upon which the structure of accountancy is predicated .

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